It
wasn't exactly an Oscar-worthy performance, but the reviews
for the February employment report were generally positive.
To be sure, the critics had low expectations, which always
reduces the bar for a passing grade. And for beleaguered
workers still suffering through the worst job market since
the Great Depression, there wasn't much to cheer about
in the February figures. The unemployment rate remained
stubbornly high at 9.7 percent, the economy continued
to shed jobs - bringing the total losses since the start
of the recession in December 2007 to 8.43 million - and
about 4 in 10 unemployed persons (6.1 million) have been
out of work for more than 27 weeks. The sorry state of
the job market continues to be a headline-grabbing lightning
rod that will undoubtedly dominate the political landscape
leading up to the midterm elections.
That
said, the markets had been braced for an uglier reading
on the employment situation, fearing that the snowstorms
battering the East Coast during the first two weeks of
February would have resulted in larger job losses than
the 35 thousand reported for the month. The general consensus
was for a decline in nonfarm payrolls of between 50 and
150 thousand. Moreover, the unemployment rate was expected
to edge higher, from 9.7 percent to 9.8 percent. Not surprisingly,
investors heaved a sigh of relief when the results came
in, sending stock prices sharply higher on Friday. What's
more, revisions to prior months revealed less weakness
in the job market than originally estimated, as a net
35 thousand workers were added to payrolls in December
and January.

Simply put, economists have every reason
to cling to a script that has been unfolding for the past
six months or so, namely that conditions are getting "less
bad by the month". That's hardly an uplifting appraisal
of an economy that remains firmly in the grips of a "jobless
recovery". Assuming that the Great Recession ended
last June or July, a widespread perception supported by
an array of economic indicators, it has now been at least
six months into a recovery that has yet to generate positive
job growth. That's bad, but hardly lives up to the jobless
recovery following the last recession in 2001, when the
economy continued to shed jobs for nearly two years following
the trough. Unless we are heading for a dreaded "double-dip"
recession, it is unlikely that such a prolonged episode
of job losses will be repeated this time.
Indeed, there is every reason to believe
that the job market would have turned positive in February
if not for the impact of the snowstorms. True, the Labor
Department acknowledged in its report that it couldn't
precisely estimate the weather-related impact on payrolls,
although it did note that: "severe winter weather
in parts of the country may have affected payroll employment
and hours." We agree, and believe that the effect
was more than trivial. Admittedly, the snowstorms may
have actually boosted hiring in certain instances, such
as for clean-up crews and for workers engaged in repairing
downed telephone wires and the like. But that was clearly
overwhelmed by the depressing influence inclement weather
had on the job market last month.
One imperfect measure of the negative
effect can be gleaned by the number of households who
claimed they did not show up for work because of bad weather
conditions. In February, that number surged to 1.1 million
workers, the highest for any month since January 1996
and the most ever for the month of February. Even more
telling was the swing from January, when 300 thousand
workers stayed home because of bad weather. The 817 thousand
jump from January to February was the largest for any
month on record. This measure of the weather effect is
imperfect because many companies still report workers
as employed even if they only receive a paycheck for one
hour of work That may explain the sizeable 0.4 percent
decline in the average workweek at factories during the
month.

Still, given the huge jump in the number
of people staying away from their jobs because of bad
weather, we suspect that payrolls could have been depressed
by around 100 thousand workers last month. At the very
least, had normal weather conditions prevailed, the economy
would have generated positive job growth, ending the need
to describe the nascent upturn as a jobless recovery.
We believe that designation will be dropped next month,
when the March report is released. Not only will the economy
recoup the weather-related losses from February (assuming
the return of more seasonal weather), the numbers will
also receive a major assist from government hiring of
temporary census workers, which should add about 300 thousand
to the payroll count.
No doubt, the expected surge in March
employment will be greeted with a fair amount of skepticism,
as analysts will cite the unwinding of the weather-related
distortions and the temporary boost from census hiring.
Hence, it will be necessary to string together several
months of positive news on jobs as well as the broader
economy before households and businesses are firmly convinced
that the recovery is hear to stay. Clearly, there are
still many doubts about its staying power. The housing
sector is still being weighed down by mounting foreclosures
and restrictive credit conditions, and many industry analysts
expect another relapse after the formidable government
props are removed. The Fed is scheduled to end its mortgage-purchase
program at the end of this month, and the homebuyers'
tax credit is set to expire at the end of April. If the
housing market has any hope of surviving the withdrawal
of government aid, the job market has to strengthen and
provide potential homebuyers with the confidence, not
to mention the income wherewithal, to support a rebound
in activity.
Even if job creation finally turns positive
on a sustainable basis next month, it would be a mistake
to expect much of a decline in the unemployment rate this
year. For one, it takes at least 100 thousand jobs a month
just to keep up with the increase in the labor force.
For another, growth in the labor force will accelerate
considerably as soon as the job market starts to improve.
Keep in mind that nearly a million workers dropped out
of the labor force over the past year because they were
too discouraged of ever finding a job. These dropouts
can be expected to flood back in at the first sign of
improving job prospects. Hence, it would not be surprising
if the unemployment rate moves higher even as hiring picks
up. That is a time-honored cyclical dynamic that often
accompanies the early stage of an improving job market.
But a move towards the previous post-war
peak of 10.8 percent reached during the early 1980s, which
seemed possible a few months ago, now seems unlikely unless
the economy sputters or, more ominously, dissolves into
a double-dip recession. There are more than a handful
of pessimists who still assign a high probability to such
a setback, citing primarily Washington's inability to
deal with key legislative issues, such as health care,
and pernicious budget deficits as far as the eye can see.
We agree that uncertainty is the enemy of growth, particularly
as it relates to the reluctance of small businesses to
take on new workers until they have a firmer sense of
the health costs involved. However, we also believe that
the economy has enough momentum to withstand the headwinds
generated by the turbulent political landscape.
Forget the robust 5.9 percent inventory-driven
growth in GDP in the fourth quarter, which gives the impression
a V-shaped recovery is underway. That growth spurt will
not be sustained in the current quarter, as most of the
inventory restocking has been accomplished, and companies
will calibrate their new orders with current demand conditions.
But demand is holding up surprisingly well in the face
of a still-moribund labor market and household balance
sheets that remain heavily laden with debt and devastated
by the steep decline in housing and stock values during
the recession. That resilience of consumers shows up in
the latest personal income and expenditure report released
this week. In January, personal consumption increased
by a hearty 0.5 percent, up from 0.3 percent the previous
month, with most of the gain driven by volume instead
of price increases. Real outlays rose by a solid 0.3 percent
during the month, with spending on big-ticket durable
goods leading the way, leaving the January level of spending
2.1 percent above the fourth quarter average.

While that broad spending measure is more
than a month old, more recent data indicate that consumers
continued to spend at a respectable pace in February.
Retailers reported strong same-store sales for the month,
and auto sales came in stronger than expected. Piecing
together these fragments over the first two months, it
now seems that consumer spending is on track to grow by
a 2 ½ percent annual rate in the current quarter,
up from a 1.7 percent gain in the fourth quarter. So,
while the inventory boost to GDP will no doubt be smaller,
the consumer sector, which accounts for 70 percent of
the total, will be larger. If business investment in equipment
and software continues to increase, as expected, and the
revival in exports stays intact, the economy could turn
in a solid performance during the fourth quarter, defying
the double-dip prognosticators.
It
is not entirely clear what is underpinning the surprising
strength in consumer spending this year. Households were
expected to put aside a sharply higher fraction of incomes
to compensate for the wealth destruction during the recession
that decimated retirement nest eggs for millions of ageing
baby boomers. But while the savings rate has increased
since reaching a low of under 1 percent in early 2008,
it has not returned to the 8 - 10 percent range that typically
prevailed at the onset of most postwar recoveries. After
reaching a high of 6.4 percent last May, the savings rate
has hovered just over 4 percent since, dipping unexpectedly
to 3.3 percent in January. The January slide should be
reversed in coming months, but it appears that consumers
may feel comfortable with a savings rate no higher than
6 percent or so during the balance sheet rebuilding process.
One reason: the astonishing gain in the stock prices since
last March has restored more than $5 trillion of value
to household portfolios. What's more, an extraordinary
volume of debt has been extinguished over the past year,
lowering household debt burdens. Hence, it may well be
that households are closer to being satisfied with their
financial condition than many pessimists expected. If
that's the case, the urgency to boost savings has lessened,
which means that the consumer propensity to spend out
of incomes will be higher than otherwise. Of course, that
propensity will not mean much if the job-creating engine
fails to crank up and generate more paychecks in coming
months. The January jobs report was a promising omen,
but that promise has yet to be fulfilled. Stay tuned.